Gold hits $1,000 an ounce as investors seek shelter

The World Today - Friday, 14 March , 2008 12:22:00

Reporter: Peter Ryan

ELEANOR HALL: With the United States economy in or near recession, global investors are making a panicked switch from the dollar to gold. The precious metal hit a new record of a $US1,000 an ounce overnight, amid concerns that the embattled US dollar will continue to plunge.

While oil also charted new highs, there is a glimmer of good news today with word that the worst of the sub-prime mortgage crisis might be over.

Business Editor Peter Ryan has more.

PETER RYAN: Throughout history, gold has been a traditional haven in volatile times such as these, as investors move their cash to hard assets that can withstand almost any storm. Like oil which is hurtling towards $US111 a barrel, gold is also priced in US dollars.

So as the greenback continues to tumble again the Yen and Euro, the scramble is becoming more intense according to Stephen Pope of the investment house Cantor Fitzgerald.

STEPHEN POPE: The more the dollar weakens and people are just driven to find alternatives. They want to stay in the dollar, but they need an asset that's actually going to actually appreciate in its numerical value, so that their net wealth is not being eroded as the currency falls.

PETER RYAN: And the slide of the US dollar is expected to accelerate.

Chris Low, an economist with the New York firm FTN Financial, says the continuing meltdown of risky sub-prime mortgage investments has exposed the fragility of a currency that's normally a shelter in a crisis.

CHRIS LOW: The dollar has been under tremendous pressure and a big part of that is that there are still mortgage investment, US dollar mortgage investments around the world. We are in the midst of a cascade of forced selling of these mortgage assets. Every one of those transactions involves the sale of dollars.

PETER RYAN: Although gold is now back below the psychological $1,000 level, speculators are betting on spiralling commodities and metals prices, with one tip that bullion could soon hit $US 1,100 an ounce. Many economists say the gold rush leads to one unavoidable conclusion.

ED MCKELVEY: I think we are probably in the initial stages of a recession, complicated by the fact that inflation has been moving higher. I think that's part of why the gold prices have been moving the way they have.

PETER RYAN: Goldman Sachs economist Ed McKelvey thinks a global contagion can be avoided, though not necessarily a more significant correction on the sharemarket.

ED MCKELVEY: I think the recession aspect of it will probably be confined to the United States, with some slowing in other parts of the world for sure, but not to the point where you really have a broad-based global recession. If you look at the markets and the stresses, you know, because markets are global I don't think you can quite say the same that the global markets are insulated here.

PETER RYAN: Even so, the global ratings agency Standard and Poor's believes the worst of the sub-prime crisis might be over, predicting that write-downs for banks, mortgage lenders and insurers will peak at $285-billion.

(Sound of the Wall Street bell ringing)

That rare piece of positive news saw Wall Street close higher today, with the Dow Jones up a third of one per cent. But there's a growing consensus that even a deluge of good news won't stop the US economy from falling into an abyss, with inflation rising and jobs being axed.

Economists like John Schmitt of the US Centre for Economic Policy and Research points to the classic cartoon rivalry between the Road Runner and Wile E. Coyote to illustrate the possible freefall in store.

JOHN SCHMITT: We're in that moment at the beginning that some people refer to a little bit as the kind of "Wile E. Coyote" moment where we run off a cliff and we're spinning our legs very fast and we seem to be holding just where we are but everybody watching knows that we're going to see the drop at some point, and it's not going to be pretty.

PETER RYAN: US consumers appear to be bracing for the worst, with retail sales across America falling 0.6 of one per cent in February.

BRITT BEEMER: I did not see American consumers getting out of their retail spending funk for at least another 12 to 14 months.

BRITT BEEMER: 40 per cent of all big ticket item purchases are related to consumers who get tax refund cheques. So if the consumer hasn't got the money to buy that refrigerator or that sofa or that washer or dryer or that dining table and chairs, they're going to postpone those purchases for a long, long time.

PETER RYAN: The dismal data heightens the chance that the US Federal Reserve will cut interest rates again next week in an emergency effort to kick start an economy that now appears to be on life support.